Paying for UPI

That UPI has been very useful and successful is unquestionable. But valid questions exist about its viability, specifically on the “Who pays for it?” topic. After all, it costs money for PhonePe or GPay or the banks or the government-owned backend system behind it to develop, maintain and keep things running.

 

When it was launched, most people had assumed a fee would be charged for its usage. Either as a percentage of the transaction, or as a flat amount. But in 2019, writes Rahul Matthan, the government passed a law prohibiting banks and service providers from charging any fee for it.

 

There were good reasons behind that decision. For high value transactions, history had shown that shops are willing to foot the fee because nobody carried that much cash and the benefit of closing a sale was worth the fee. But for low value transactions, the fee became a significant fraction of the profit, which is why credit cards never caught on in most places in India.

“It is to address this problem—to ensure that the benefits of the digital payments ecosystem extend to small-ticket transactions—that the government kept UPI free of such a charge.”

 

But the danger is that at some point, the cost becomes unbearable. We need to find a way to pay for it and not let UPI fail. Matthan proposes one option.

 

Credit card companies charge a fee called MDR. But this wasn’t just for the convenience and amount needed to keep things running. Remember, the card user may default on the card payment – so the card network was ensuring the shop got the money regardless of whether the card network (bank, Visa, MasterCard) got paid. The fee they charged was also to compensate for some inevitable losses where the card user didn’t pay the due amount.

 

But with UPI, one particular risk doesn’t exist, argues Matthan. Transactions are instantaneous, from the bank of the buyer to the seller. There is no risk of non-payment to any actor in the entire trail. And therefore, the UPI fee should be lower than what credit card networks charge.

“The UPI ecosystem just needs to earn enough revenue to meet the cost of running the UPI system, plus a reasonable profit on top of that.”

 

A flat fee. A low fee. That’s what Matthan proposes. Say ₹10 per month to be paid by the user. How did he arrive at that number?

“For context, the average monthly revenue per user of telecom companies is in the range of ₹100, which suggests that everyone who uses UPI today can afford to pay at least that much a month.”

Even ₹10 per month per user translates to a collection of ₹6,000 crore every year. More than the current estimated cost of ₹5,760 crore per annum to keep the UPI system working. Share the collected amount among the entities involved in the UPI chain (government system, banks, app providers) and the system become financially sustainable.

But first, the government regulation against charging any fee on UPI needs to be changed, perhaps with an upper limit. Such a move, says Matthan, is necessary if we want to ensure UPI continues to be the spectacular success that it has become. Given the tiny fee involved, and how much the government trumpets systems like UPI in domestic and international forums, one can be optimistic on this front.